Good afternoon, everyone, and welcome to Data I/O's Third Quarter 2025 Financial Results Conference Call. Please note, today's event is being recorded. At this time, I'd like to turn the conference over to Mr. Jordan Darrow, Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome to the Data I/O Corporation Third Quarter 2025 Financial Results Conference Call. With me today are the company's President and CEO, Bill Wentworth; and Chief Financial Officer, Charlie DiBona. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, results from operations, financial position, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reforms, product releases, new industry participants, and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which involve known and unknown risks, uncertainties, and other factors, which may cause actual results to differ materially from those expressed or implied in such statements. These factors also include uncertainties as to the impact of global and geopolitical events, international tariff and trade regulations, order levels for the company, and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, pricing, and other activities by competitors and other risks, including those described from time to time in the company's filings on Form 10-K and 10-Q with the Securities and Exchange Commission in our press releases and other communications. The company may also reference GAAP and non-GAAP financial performance measures, including one-time items, which are intended to provide listeners with a means to better understand the company's performance. Please refer to reconciliations in our third quarter earnings press release issued today after market close. Finally, the accuracy and completeness of all discussions on this call, including forward-looking statements, should not be unduly relied upon. Data I/O is under no duty to update any forward-looking statements. And now I'll turn the call over to Bill Wentworth, President and CEO of Data I/O.

Thank you, Jordan, for that introduction. I want to thank the people that have taken the time to take out of their day to listen to our earnings call and look forward to the conversation and specifically the Q&A after. I spent the last week thinking about the last year since this month marks the year that I started as CEO of Data I/O. One of the things that I noticed as a Board member is that the company was certainly doing well in the automotive industry, but it had a fairly high concentration in that business. While it's still a great business for Data I/O, and even in this softness, it's still driving quite a bit of our revenue, it's also one of the things that needs to motivate us to explore new markets and new businesses. I have reflected on the year and where we've invested during the initial months. We focused on evaluating the team and understanding the strengths and weaknesses of the organization from a people standpoint. We brought in a new Director of Engineering, John Duffy, who started in January and has done a phenomenal job. His focus has been on refreshing our manual product line and developing our next-generation program, which we plan to introduce at Productronica at the end of this month. I'm very excited about this. We've also received a couple of awards already at some shows with the new reskinned LumenX, which has enhanced our ability to pitch the platform and engage with the engineering communities. This has driven some ramp in our manual systems and preorders are looking promising for Q1. Rounding out the product portfolio was a key objective this year, alongside strengthening our team. We must have the right people to design the products and bring them to life. When you compare our product portfolio from a year ago to today, the difference is striking. It truly embodies what Data I/O stands for, and we are excited to bring it to market. The next generation of our long-term platform has already begun its design cycle this quarter. I would call it Data I/O's AI moment at the end of next year when we release that product. However, we're not waiting to drive revenues with the reskinning of the LumenX, which will help us pivot to the new platform launching at Productronica. We're also refreshing our automation solutions. We've identified some gaps in the automation solutions for processing programmable technology that we're eager to address with new platforms potentially launching mid-next year. Charlie will further elaborate on how we will manage margins and pursue margin expansion throughout next year. The exciting part is the potential to tap new businesses in adjacent markets. The market we serve today is approximately $100 million to $200 million at best. Services definitely need to be a pillar of this company, and we're initiating conversations regarding that now, given that it represents a market opportunity exceeding $1 billion, characterized by recurring revenue streams. Our discussions include embedding our technology in testers, opening a multibillion-dollar market opportunity that allows us to access up to 60% to 65% of where data gets provisioned, positioning Data I/O for substantial growth. These activities are gaining traction and while I cannot confirm the timeline for revenue realization, I am pleased that we initiated these conversations earlier than anticipated. We're also pursuing vertical integration opportunities, particularly with companies like Cohu, which has invested in sockets that play an essential role in their market strategy. This expertise is critical for us as the second most important aspect of programming is ensuring reliable contact with the device. The socket market is valued at approximately $7 billion. The ability to secure such expertise internally can lower our operating costs and serve as a lead generator. All three new business units are interconnected and contribute to each other's revenue streams, highlighting the benefits of being in adjacent markets. I'm excited about our plans for growth in 2026 as we have the products, people, and services we need to accelerate expansion. We're making strategic investments in our engineering department, including onboardingadditional algorithm writers to facilitate our transition from older platforms to new ones, gearing up for this growth. That concludes my remarks for now, and I look forward to the upcoming Q&A session. I'll now hand it over to Charlie.

Thank you, Bill, and good day to everyone. It's a pleasure to speak with you all today, my first call as CFO of Data I/O. I'm excited about the prospects of this company and this role in particular. In my remarks, I will address our recent financial performance in greater detail. My comments will focus on key points of interest for the third quarter of 2025, recent trends, and our outlook. Net sales in Q3 2025 were $5.4 million, down from $5.9 million in Q2 '25 and flat from the prior year period. Bill mentioned some pressures that have continued to impact our revenue performance. These include a temporary realignment of tech spending related to AI and changes in the global EV landscape affecting automotive electronics. Global trade and tariff negotiations, once a gating factor, remain but are now considered tertiary concerns. Automotive electronics, our primary business segment, represented 78% of our third quarter bookings compared to 59% for all of 2024. For Q3 2025, consumable adapters and services contributed 24% of total revenue, creating a base of recurring revenue, while capital equipment sales constituted 76% of total revenue. Again, Asia performed relatively strongly within the EV sector of automotive electronics, particularly with customers in China and Korea. However, Europe faced pressure with capital equipment spending influenced by tariff uncertainties and disruptions in the EV market. The Americas saw flat performance, aided by systems to be deployed in Mexico. Global bookings for the quarter were $5.2 million, reflecting over a 7% increase from $4.7 million in Q3 2024. New booking activities were driven by demand for the PSV7000 automated programming system, with eight PSV7000 systems complete with LumenX programmers booked in Q3 2025. As of September 30, 2025, our backlog stood at $2.7 million, down slightly from $2.8 million as of June 30, 2025. In Q3, three systems were booked and shipped, while seven remain in the backlog. Gross margin as a percentage of sales reached 50.7% in Q3 2025 compared to 49.8% in Q2 and 53.9% in the prior year period. Improved margins in the quarter were driven by a higher margin product mix and configuration of automated systems from the PSV7000 driven by demand. Direct material costs remained steady and consistent due to effective supply chain planning and other actions that mitigated the impact of tariffs, trade, and inflationary pressures. Q3 gross margin benefitted from this favorable product mix and automated systems configuration. We have commenced a thorough review of strategies for enhancing gross margins, some of which are already underway and are expected to support sustainable gross margins in the longer term. These strategies may include pricing modifications, labor efficiencies, supply chain optimization, and focusing on direct sales engagements with key customers, especially in the Americas and Europe. In terms of operating expenses for Q3, we reported $4.1 million, up from $3.8 million in Q2 and $3.3 million in the prior year. Our Q3 spending closely tracks our operating expenses earlier in the year, excluding around $585,000 in one-time expenses. Among these, $200,000 was related to the investigation and remediation of a cybersecurity incident first identified on August 16, 2025. Another $130,000 pertains to executive transitions, and a further $130,000 links to technology and IT-related growth initiatives. For context, our total onetime expenses in Q2 2025 were $480,000. Similar to costs of goods, we are diligently reviewing our operating expenses to identify savings and efficiencies. The onetime investments and expenses in Q3 2025 negatively impacted our profits, adjusted EBITDA, and cash balance for the period. Without the onetime expenses in Q3 2025, our operating loss would have been $808,000, compared to a reported loss of $1.393 million and a loss of $325,000 in Q3 2024. Additionally, adjusted EBITDA would have been $563,000 instead of a reported adjusted EBITDA loss of $1.15 million and a positive adjusted EBITDA of $37,000 in the prior year period. Excluding one-time expenses, our cash balance would have been approximately $600,000 higher, amounting to just over $10.2 million at September 30, compared to the reported $9.7 million and $10.3 million as of December 31, 2024. Our continued discipline in spending and cash management reflects a stable cost structure while also investing in our Unified Program platform and other new products to enhance our IT systems, both of which enable top-line growth and scaling of the business. Data I/O's net working capital was just over $14.4 million as of September 30, down from $16.1 million at the end of last year, partly due to one-time spending through the three quarters of this year. Importantly, the company continues to have no debt. This concludes my remarks for the third quarter of 2025. Operator, would you please start the Q&A portion of the call?

The first question comes from David Williams with Benchmark.

Congratulations on the progress here and just the confidence in the tone. Certainly good to hear. Yeah, so lots of exciting things going on. And I guess maybe first, I wanted to touch on, Bill, you and I have talked before about just the technology and progressing that and taking it into the future. Outside of maybe what you discussed just now, what do you think, if you look out maybe two years or three years from now, how do you envision just the platform overall? Do you think that all of the growth and the areas of growth that you have that you're looking towards, can you do that, I guess, and still maintain kind of your focus on the core business?

Yeah. It's a great question, David, because I know it sounds like we have a lot going on, which we do, which is great. But it all revolves around the platform, and that's the beauty of it. So when you think about the platform that we're building and currently designing, that's really going to be a platform that will last for a good 10 years. We had to round out the existing portfolio of platforms we had and just kind of fill in some small gaps until we could build this next-generation platform. But that platform will be the one we move algorithms onto, and they'll be forward-compatible with the new long-term platform, expected to be released at the end of this year. While this fills a gap, the design will also consider the embedded opportunities we have with major global test companies. I cannot disclose specific names, but it certainly represents a significant opportunity for Data I/O. This aspect of the data provisioning market accounts for around 25% to 35% of overall data provisioning. The services piece where we would also leverage our platform is also significant; providing services allows us to test our technologies up front, ensuring problems are identified before they reach the customer. This is a market exceeding $1 billion and spans multiple domains, offering insulation to the company from domain concentration issues we currently face. Lastly, for our automation technology, we have specific needs to address various types of technologies, from microcontrollers to programmable clocks to sensors up to high-density UFS flash. This platform must accommodate all of that. The solutions we provide need to be targeted for the technology, for example, microcontrollers should be programmed quickly, so using a large system for that doesn't make much sense. We're focusing on developing new handler technology that promotes faster programming times at a better value. Additionally, we've identified a gap in service offerings, such as OEMs wanting in-house programming or service providers needing tabletop automation. This gap has existed for years and Data I/O attempted to address this issue back in 2008 with the FLX500. While it was a well-engineered machine, it was overcomplicated. We still have the specifications and software from that project, and we're planning to revive it, as we believe it can be a strong seller. All these initiatives interconnect and drive revenue for one another. I'm excited about 2026, as we can finally begin propelling the growth engine. We will have the necessary products, people, and services in place to execute these plans, and we will continue to make these investments through the end of the year.

No, that was fantastic color. And then maybe secondly, just thinking about your customers and how they're viewing some of these changes, obviously, in a positive way. But do you feel like you're gaining traction there? And I'm assuming that your customers are really leading the way in some of these new technologies. But just anything on the feedback or traction you're seeing, I think, would be very helpful.

Yeah, sure. As a customer myself, I have seen many of the gaps for years, so it's easy for me to view this from their perspective. This week, we have had a long-term customer visiting our office, and the ability to discuss ideas directly has been invaluable. They have been providing us with feedback on what they need in the future, and it's encouraging to see them enthusiastic about what we're developing. I'm confident that we are building the right products that our customers want and, without a doubt, receiving feedback from them is insightful and essential.

The next question is from David Marsh with Singular Research.

Bill, congratulations on the awards you’re receiving at the trade shows. My question is, based on your experience in this industry, what have you noticed regarding the typical sales cycles from gaining recognition at trade shows to generating customer interest that leads to actual orders?

Yes, a lot will depend on the technology event. In our industry, significant changes in silicon usually drive spending. Certain technological breakthroughs, such as with UFS, have been challenging, but we are making strides and expect to announce improved yield rates on UFS soon. It's critical because UFS is predominantly used in the automotive sector, which is currently experiencing some struggles. However, as the market rebounds and refreshes their technology, they will seek out companies like Data I/O that offer solutions. Additionally, the rollout of 1 terabyte flash in 2027 means that there is a strong need for our programming technology amidst the industry's advance in high-density memory technology. We'll be updating our product portfolio including the PSV line that has led the market for over 10 years. Right now we are focusing on targeting accounts that have older PSV systems to encourage them to refresh. I believe there's a window of opportunity currently, as it tends to be easier to adopt new platforms during slower times.

That's a great lead-in for my next question, which is as rates are starting to come down a little bit in the U.S., and we're starting to hopefully get some clarity on global trade.

I love your hope.

We got the President now making a lot of deals, hopefully.

That's right. Well, deal away. Good for all of us.

I mean, I guess it is kind of a real-time question. Are you seeing any optimism, particularly outside of the country regarding trade partners, with some of this tariff situation potentially clearing up and giving us a clearer path forward?

Yeah, and I would say this cautiously because it's not solely focused on trade issues. Recently, there was a passive supplier owned by a Netherlands company that became Chinese-owned, and now rare earth minerals are getting restricted. They comprise about 40% of automotive products. One of our larger automotive customers informed us this week that they're shutting their factory for three weeks. However, conditions can change quickly, just like trade talks. It's my hope that any new trade agreements will address concerns surrounding rare earth minerals as this remains a contentious issue, but for now, things remain uncertain.

The next question is from George Marima with Pareto Ventures.

Welcome aboard, Charles. A lot there. So let's pull on the partnerships and accretive acquisitions thread. What kind of hurdle rates are you looking at for that? And what sort of, categorically speaking, what sort of acquisitions would we be looking at in partnerships? What would that look like?

Well, partnerships will mainly be focused on embedding our technology, a solution where our technology enhances another company's offering, ultimately adding value for their customers. We've had significant discussions with one of the major testing firms in the world, which we're looking to continued at Productronica, and this could lead to a contract which may start to drive our technology development. I can't predict when revenue might be realized. The testing company is aiming for a second half of next year release which gives you an indication. Much depends on our involvement; we are advocating to be the primary provider of this technology, leading the development. It's crucial for us to ensure our intellectual property is well protected. For services, we've begun conversations regarding opportunities that could provide us with steady revenue streams which we currently lack. Some opportunities might not require a large capital outlay but could significantly benefit our revenue growth. We're opening various doors; I recently hired a boutique advisory firm that has commenced work, and I provided them with a list of 25 potential acquisition targets. This will be an ongoing activity as we strategize.

On the services, are we talking about just programming services or beyond that?

No, programming services.

Can you provide more details on what this would look like if a company hired you?

Well, the specifics depend on the relationship. Currently, we do not have a programming services division, which prevents clients from hiring us. We aim to establish this division by acquiring relevant capabilities. Once that’s in place, we can position our service offerings within various environments, whether that be a client's warehouse or the production floor. Our advantage lies in being equipment manufacturers, providing the necessary equipment and technical expertise needed for programmable parts. Services should ideally be a cornerstone of our strategy, if not the primary focus, particularly given the scale of this market.

So as we look out to next year, it sounds like the cadence would be your internal new product launches, then embedded applications and socket manufacturing, followed by services rolling in later.

Yeah. I would actually see services coming first.

Oh really? Okay. And then when you talk about leading the semiconductor road maps, are we talking about just UFS flash or are there other areas as well?

No, the key is staying connected with semiconductor firms as they regularly rollout new silicon. We have recently entered into 6 or 7 information-sharing agreements with various semiconductor companies. It's essential to engage with them, as they can also help generate leads.

Well, I really like the energy you guys have. Keep it going.

No, I'm truly excited. After a long year, it's refreshing to start focusing on execution rather than just pondering our options.

The next question is from Casey Ryan with WestPark Capital.

Interesting conversation. So I'd like to ask about the EV disruptions, I guess, I don't know if that's the word that was used in the press release, but you did suggest Asia was sort of okay and then talked about Europe a little bit and maybe the U.S. I'm interested in two areas around EVs: is it mainly the headline factors regarding the credits and any policy impacts or are there fundamental changes occurring in the OEMs' strategies?

Well, it's no secret that Asian manufacturers are performing very well globally. Notably, BYD has made significant strides in the European market, and domestically, they are consuming a significant portion of their production. We have received several orders from them. South Korean automotive part manufacturers are also thriving, such as Bobis, which integrates into various supply chains. It's best to think of various strong pockets rather than an overall trend, as we operate within some of these segments. Meanwhile, European auto manufacturers are struggling. Recently, we held a call with our representatives, discussing their outlook for the upcoming year. They were genuinely excited about new products we are set to roll out, as these are addressing key market gaps that we have yet to penetrate. The excitement stems from the fact that these are products they can readily sell in their regions. Sales have been notably hit, with some representatives reporting a downturn of 50% to 60% since their August break. Regarding the U.S., we've heard from a friend who spoke to the VP of Supply Chain Technology at BMW who mentioned that inventory issues are cleared up, but demand remains subdued. It’s important to note that without AI investments in the U.S, our economy would not look as robust.

I appreciate that. Is there some differentiation between the broader auto market and EVs specifically, and does that distinction matter from your perspective?

Not particularly; we see much technology incorporated in cars. As these markets recover, we have customers engaged in various segments including EV, hybrid, and traditional combustion engines. Right now, EV manufacturers and key components suppliers are remaining steady with shipment volumes. It’s worth noting that automotive numbers might remain flat, but overall content within vehicles will increase by about 10% this year. Consequently, while we may face downturns in certain areas, it’s essential to monitor how revitalizing projects will evoke demand for equipment.

Okay. The systems seem to be holding strong in the quarter, particularly capital equipment. When I take 76% of the revenue anecdotally, it looks close to $4 million. It seems consumables were somewhat challenged. Is consumable performance tied to unit sales?

Yes, we had strong socket sales in the first half of the year, so I wasn't surprised to see a decline in Q3. In times of slowdown, manufacturers process fewer parts, meaning there is less demand for replacement sockets. As volumes bounce back, we should anticipate that number returning. While this quarter is off to a decent start, it hasn't exploded. Companies tend to adjust their CapEx budgets and we might see orders come in towards the end of the quarter. Typically, these items have a short lead time and the process is quite flexible, allowing for orders within 3 to 5 weeks, facilitating regime changes in inventory. The more prevalent our platform, the greater demand we will see for sockets.

I have three final questions regarding margins. Overall margins were relatively stable despite a considerable shift in mix. Where do systems and consumables align in terms of carrying margin? Initially, I assumed consumables would provide higher margins.

No, margins are typically higher for consumables, around 60% to 70%, sometimes more. However, we are shouldering some additional expenses currently as we aim to scale the business effectively. We have consultants helping us, and this expense should be alleviated in the first half of next year. Furthermore, we are seeing opportunities for margin expansion via improved pricing models. We are reviewing our pricing strategies and advocating for custom value-based pricing. Our representatives are now being encouraged to add value in the sales process. We are protecting margins and driving revenue.

Yes, we’re up sequentially and we anticipate a focus on both the costs of goods and operational expenses to identify efficiencies. The potential for pricing improvements is remarkable, and we are exploring them in greater depth.

Charlie and I, along with Monty, will be dedicated to digging deep into our pricing strategy this quarter.

In a potential future scenario where revenues are balanced, can we envision gross margins reaching 55%?

Theoretically, yes, that is possible.

We have accomplished that before, so I don't see why we couldn't reach that with proper management of our expenses and improvements in our pricing strategies.

Regarding the services business, what sort of contribution to margins should we expect?

Based on my experience, services businesses generally operate between 52% and 58% margins. Given our dual advantage as equipment manufacturers, we could maintain competitive pricing without compromising on our margins.

Ladies and gentlemen, at this time, we've reached the end of the question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

I want to thank everyone on the call for their great questions. It's always a pleasure to discuss our business. This year has certainly been interesting, and I believe we have a remarkable team moving forward. We’re building exciting products and maintaining a solid growth plan for next year, which includes engaging in discussions with potential future partners for our technology. Thank you for joining today, and I look forward to providing updates next quarter.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.